Addus Reignites M&A Engine, Targets Home Health and Hospice Acquisitions

The feeling around the recently expanded Addus HomeCare Corporation (Nasdaq: ADUS) headquarters in Frisco, Texas, is different from just three months ago.

Speaking on its Q2 earnings call in August, Addus leadership said the company was in “rebounding mode,” but also not as affected by COVID-19 uncertainties as they initially expected. Additionally, recruiting had become a pain point for the organization, Addus executives noted at the time.

Their tune was different Tuesday during the company’s Q3 earnings call, as Addus execs reflected on a strong quarter based on year-over-year growth despite harsh economic realities tied to the COVID-19 virus. Instead of more recruiting difficulties, company leaders suggested Addus is now in a successful hiring stretch.

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“Our revenues continue to be adversely impacted by the COVID-19 pandemic, with a decline of approximately $6 million dollars from our pre-COVID 2020 run rate,” Addus CEO Dirk Allison said on the call.

Addus is a provider of home health, hospice and personal care services. It currently provides care to about 44,000 clients by way of 215 locations spanning 25 states in the U.S.

In Q3, its net service revenues were nearly $194 million, a 17% increase from about $169 million in Q3 2019. Its personal care services line accounted for $165 million of that figure.

The negative monetary impact tied to COVID-19 is mostly due to the company’s New York personal care market and its New Mexico hospice operations, where it’s having trouble gaining access to patients in facility-based settings.

“We estimate our fourth-quarter revenues will continue to be negatively affected by approximately 3% to 4% as compared to our pre-pandemic run rate,” Allison said. “The majority of this reduction is occurring in our New York market.”

New York state of flux

The state of New York has reduced its Medicaid payments uniformly, dealing a major blow to Addus, which has a large market share in the state and also deals heavily with Medicaid as a payer.

The New York State Department of Health announced that all non-exempt Medicaid payments would be reduced across the board by 1% beginning Jan. 1, with an additional 5% reduction taking place beginning April 1 of this year.

“Approximately one-third of our New York business is directly with the state and was immediately affected by this reduction,” Allison said. “We continue to work with our New York State associations to mitigate any future rate reductions and help educate the state leaders of the value of home- and community-based services.”

While headwinds have persisted out of New York, the state’s budget is not the only potential problem moving forward. States nationwide will have to navigate difficult budget challenges due to the ongoing COVID-19 crisis in the coming months and years, which could challenge a provider like Addus.

Addus would argue, however, that with federal relief to states and the general population, states should be able to survive budgetary constraints without undermining home- and community-based service providers.

“States are currently receiving an additional 6.2% federal Medicaid match as part of the CARES Act that will continue through the duration of the health emergency, which currently goes through the first quarter of 2021,” Allison said. “Our home-based care is cost effective and significantly safer than having patients in long-term care facilities in today’s challenging environments, which we believe the leadership of our states have recognized.”

Still, Addus’ New York market census is about 17% below what it was in Q1 of 2020.

But in two of Addus’ largest markets — Illinois and New Mexico — the company has seen a promising bounce-back in billable hours per week.

Those two states have shown promise heading into Q4 for the company.

“With the upcoming rate increase in Illinois on Jan. 1, we should continue to see solid same-store growth in our personal care segment,” Allison said.

M&A strategies

Addus recently acquired home care service providers in Pennsylvania, Montana and New Mexico, as well as VIP Health Care Services, a provider out of Richmond Hill, New York.

“Acquisitions have been and remain an important part of our growth strategy at Addus,” Allison said. “We have strategically maintained a strong capital structure, which allows us to take advantage of acquisition opportunities as they occur.”

Addus “took a short pause” from pursuing new acquisitions during the early phases of the COVID-19 pandemic, but it is now fully reengaged in the process of identifying and closing additional acquisition, he added.

One of the company’s chief M&A concerns remains building density in different geographic markets. Although personal care services dominate the greater portion of Addus’ business, it hopes in the future to build out its home health and hospice segments to complete the “three legs of the stool,” an expression commonly used within the home-based care space.

Addus feels as though it is working toward that goal in New Mexico, in particular.

“We will continue to look in the personal care market, which is obviously the biggest part of our business, trying to fill out states in which we currently have strong operations,” Allison said. “But at the same time, we want to continue to look at the clinical side of our business, adding home health and hospice in those markets.”

Recruiting during COVID-19

After initial bumps in recruiting at the beginning of the COVID-19 pandemic, Addus has rebounded on the recruiting and hiring front.

“On a company-wide basis, we continue to see an overall reduction in patients on hold and improvement in our caregivers hiring numbers, which contributed to a sequential 6.5% increase in our personal care same-store census,” Allison said.

New York still remains a challenge, as there are still enhanced unemployment benefits in place in the state, which can discourage caregivers from coming back to work.

From August forward, however, Addus says that it’s up 2% in terms of caregiver hires per business day.

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